When is a current account better than a savings account?

Stashing your cash in your current account used to be the worst thing you could do if you wanted to earn a decent rate of interest – but now some current accounts offer better returns than savings accounts.

Current accounts are generally known for paying paltry rates of interest, and that’s if they offer anything at all. Most pay a miserly 0.1% annual interest before tax, meaning that savers need to transfer any surplus money into savings accounts for it to stand any chance of beating inflation.

But falling savings rates coupled with more innovation in the current account market mean that, in some cases, you could be better off holding cash in your current account rather than moving it elsewhere. We look at which current accounts pay the best returns….

Lloyds TSB Vantage

Even the best easy access savings accounts now pay less than 3.00%, but Lloyds TSB is offering savers who opt to add ‘Vantage’ to their current account an annual equivalent rate (AER) of interest up to 4.00% a year.

However, as with most competitive savings rates, there are several catches, so you need to read the small print carefully.

First, you will only be eligible to add Vantage if you pay in at least £1,000 a month to your account, and stay in credit. Interest rates are also tiered, so the more you hold, the better the rate of interest you will receive.

For example, if you apply to add Vantage to your account before October 31, 2012, you will receive interest of 4.00% AER on the entire balance, provided you keep between £5,000 and £6,000 in your account, and you have set up at least two direct debits from the account.

You will only earn 4.00% for a year, until October 31, 2013, and no interest will be paid on any balance over £6,000. So, if you had £6,500 in your account, you would earn 4.00% AER on the first £6,000, but nothing on the extra £500.

After this October 31 next year, savings between £3,000 and up to £5,000 will earn 3.00% AER, and no interest at all will be paid on amounts above £5,000.

Rates on lower balances remain unchanged, with balances of more than £1,000 and up to £3,000 earning 2.00% AER while balances between £1 and £1,000 earn 1.50% AER.

You can add Vantage to Lloyds TSB Classic, Silver, Gold, Platinum and Premier accounts via branch, PhoneBank or internet banking, if you’re registered.

According to Lloyds TSB, savers who take advantage of the 4.00% AER offer before October 31 could earn up to £235.80 in gross interest for a year.

However, this calculation doesn’t seem entirely realistic as it is based on a customer maintaining a constant daily balance of £6,000 consecutively for 12 months, remaining in credit and paying in at least £1,000 per month. Given that most people use their current account to cover most of their outgoings, most people will have balances that fluctuate widely over the year.

Santander’s 123 current account

Santander’s 123 current account also pays savers interest, but again there are several caveats. The account requires customers to pay in at least £500 a month, set up two direct debits and maintain a minimum balance of £1,000 if they want to receive interest.

However, if you are able to meet this criteria, then with a rate of 3.00% paid on balances from between £3,000 to a cap of £20,000, returns are again higher than any easy access savings account currently on the market.

Balances between £2,000 and £3,000 earn a lower rate of 2.00% AER, while if you have between £1,000 and £2,000 in your account, you earn 1.00% AER. You won’t receive any interest on balances below £1,000.

Another perk of the account is that it also provides cashback, so you earn 1.00% back on water, council tax and Santander mortgage payments of £1,000 or less, 2.00% on gas and electricity bills and 3.00% on mobile, home phone, broadband and paid for TV packages.

But there is one major drawback. The account has a £2 monthly fee, so you will either need to keep a large balance in it to maximise the interest you earn, or make sure you spend enough on the bills outlined above to earn sufficient cashback to cover the fee.

Halifax Reward Account

The Reward Current Account doesn’t pay interest, but provided you pay in a minimum of £1,000 a month, you will receive £5 a month, whether you are in credit or overdrawn.

You can withdraw up to £300 a day from this account, but from November 2, 2012, this limit rises to £500 a day.

Bear in mind that this account won’t suit those who regularly dip into the red, as you will be charged daily fees of £1 for arranged credit of up to £2,500, £2 for arranged credit of above that amount and £5 a day if you use an unplanned overdraft. These overdraft rates are also increasing from November 1 which you can read more detail on in Laura Howard’s article.

Linked accounts

While only a few current accounts pay competitive rates of interest when you are in credit, there are some which offer access to exclusive linked savings accounts paying impressive returns.

For example, First Direct’s 1st Account not only gives new customers a switching incentive of £100 and but also offers access to its one-year Regular Saver Account paying a generous 8.00%, provided you pay in between £25 and £300 a month.

You must pay in £1,500 a month to qualify for the current account, and pay 15.9% on any authorised overdraft. The current account itself pays no interest at all when you are in credit.

Another option worth considering is HSBC’s Bank Account. Again, you won’t earn interest if you are in credit, but you will be offered access to HSBC’s Regular Saver account, which pays 4.00% AER if you pay in between £25 and £250 a month. If you are an HSBC Premier, HSBC Advance or Passport customer, you earn a higher rate of 6.00% AER.

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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